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The Power to Tax: Analytical Foundations of a Fiscal Constitution; Brennan, Geoffrey and James M. Buchanan
10 paragraphs found.
Ch. 3, Constraints on Base and Rate Structure
Modern public-choice theory has incorporated the effects of tax instruments on public-goods supply in a constitutional choice approach. Almost exclusively, however, the public-choice model for constitutional fiscal choice has embodied the assumption, explicitly or implicitly, that postconstitutional budgetary decisions conform to the public-goods demands of the median voter or his representative in a legislative assembly. For this approach, see James M. Buchanan, Public Finance in Democratic Process (Chapel Hill: University of North Carolina Press, 1967). The analysis in this book differs critically from the public-choice theory analysis, in that we substitute a revenue-seeking Leviathan for the demand-driven and essentially passive government which that analysis assumes.
Ch. 4, The Taxation of Commodities

If there can be no preference for broad-based taxes derived from excess burden comparisons (rather the contrary) within our Leviathan setting, the choice between broad- and narrow-based taxes—say, between a tax on A and a tax on B, as depicted in Figure 4.1—depends solely on the level of public-goods supply which the citizen expects to want. This anticipated desired level of public-goods supply depends in turn on both the predicted demand for public goods and on the total cost of providing them.


Figure 4.6. Click to open in new window.
Figure 4.6

This relationship between rate discrimination and excess burden has implications that are worth exploring, even given the idealized confines of the model. To do so, we can ask the following question: If, under a uniform proportional tax on X, the level of revenue is precisely that desired, could we be certain that allowing discrimination by means of the rate structure would be undesirable? For any other form of discrimination so far considered, the answer would be an unambiguous affirmative: discrimination would increase maximum revenue, increase excess burden, and push the level of public expenditure beyond the desired level. In this case, where the discrimination involves differentiation in rates over separate quantities of commodities purchased, however, the conclusion is not definitive. The move from the uniform proportional rate to the perfectly discriminatory set of regressive rates would, in the linear case, exactly double the revenue collected from each individual and hence the total revenue derived. It would, however, increase the costs endured by each citizen-taxpayer by only one-third (again assuming a linear demand curve for the taxed commodity). These propositions can be demonstrated by appeal to Figure 4.6. In the uniform nondiscriminatory tax case, the revenue derived from X is the area MNSW, representing equation · Qx'. Under this tax regime, the individual enjoys the net consumer surplus depicted by triangle LMN. Consider the move to the discriminatory tax regime: the total revenue is here the full area of triangle LWE x because all consumer surplus is appropriated by government in tax. Now, triangles LMN and NSE x are congruent, because MN is equal to WS, which is in turn equal to SE x (i.e., Qx' is exactly half of Q x), and MN and SE x are parallel. Further, we know that NSE x is exactly one-half the area of MNSW. Hence, LWE x has twice the area of MNSW: revenue is twice as large in the perfectly discriminatory regime. And LMN has an area equal to one-third of MNE xW. We can therefore conclude that, in the move from uniform to perfectly discriminatory taxation, total revenue (and the level of public-goods supply) doubles, while aggregate costs rise by one-third. There has clearly been a reduction in the per unit cost to the citizen of public-goods supply. We know that


where G is the level of public-goods supply, R is the level of revenue derived by government, and the subscripts d and p refer to the perfectly discriminating and uniform outcomes, respectively. Further,


where C is total cost to the citizen and equals the sum of excess burden and revenue.


Figure 4.7. Click to open in new window.
Figure 4.7

In short, perfect discrimination both increases the level of public-goods supply and reduces the per unit cost of public-goods supply. In order to determine whether the citizen-taxpayer would prefer the perfectly discriminating solution to the simple uniform outcome with the same tax base, we need to examine the value that he places on the additional units of public-goods supply he obtains. We can do this in a simple way by appeal to Figure 4.7. In this diagram, the revenue derived from tax base, X, under a uniform proportional rate structure is depicted by r x, and the corresponding level of public-goods supply by G x, where r x and the horizontal line (1/ a) MC g intersect. The aggregate marginal cost, including excess burden, of this expenditure level is 3/2(1/ a) MC g and the desired level of G, depicted by G*, occurs where the citizen's-taxpayer's predicted demand for G, D g, intersects this aggregate marginal-cost line. Now, let us suppose that X is an appropriate tax base, given a uniform proportional rate structure. Then, G x and G* will represent identical levels of public-goods supply; Figure 4.7 is drawn on this basis.


It is interesting to note, however, that beyond the requirement that a be positive, its value plays no direct role in the foregoing analytics at all: everything hinges on the elasticity of the demand curve for public goods. In some ways, this is a slightly surprising result because it seems to imply that the value of the increment to revenue that the move from proportional to perfectly discriminatory taxation generates is independent of the proportion of that revenue expended on public goods. However, this apparent anomaly is explained by the fact that the parameter a exercises a similar influence on both the value of the incremental units of G and the units originally allowed for under the proportional tax structure alternative. To the extent that a does exercise an influence on this calculation, it does so indirectly and in a slightly surprising direction. The smaller a is, ceteris paribus, the higher the price and hence the smaller the quantity of G within the neighborhood of which the extension of public-goods supply occurs. It seems reasonable to presume that, as in the case of a linear demand curve, the elasticity of demand will be higher in this range. In this sense, the smaller the proportion of revenue spent on public goods, the greater the likelihood that the citizen will desire the extension of revenue that the shift from a proportional to a perfectly discriminatory rate structure makes possible.

Ch. 6, Money Creation and Taxation

Comparison of money and the land analogy.  In some ways, money is similar to the land in our simple example, but in other ways it is profoundly different. It is similar in the sense that the time profile of supply determines the "price" in each period: all future releases onto the market will be taken into account in determining current prices. To the extent that individuals' expectations about those future releases are in error, individuals will bear capital losses and government can increase its revenue acquisitions from sale above the "maximum revenue yield," L* Q*. In much the same way, the demand for money depends on expectations about the future quantity of money that government may release. If those expectations are wrong, the government might obtain revenue significantly in excess of the maximum revenue yield when expectations about the future course of the money supply are completely accurate.


In this conceptualization, the demand curve for real money balances in Figure 6.3 becomes analogous to that for land in Figure 6.2. But there is an extremely important distinction between land and money that emerges here. As noted earlier, with land the supply or stock is measured in units of physical quantity directly (in acres, square miles, or square feet). The number of such physical units expected to be in productive use determines the prices that persons are prepared to pay for rights to permanent usage. The monopoly supplier can determine this price, or value, by changing the physical quantity offered for sale.

Ch. 9, Open Economy, Federalism, and Taxing Authority

The potentiality for shifting the burden of taxes from citizens to foreigners depends on the degree to which domestic demand and supply may be separated from foreign demand and supply and upon the relative elasticities of the relevant demand and supply functions. In considering possible tax bases that might be assigned to government, the individual would favor those for which foreign demand looms large relative to domestic demand, and for which domestic supply is relatively elastic. Hotel rooms in Bermuda offer an example. At a constitutional level, the Bermuda government might be assigned the authority to levy taxes on hotel rooms with the assurance that only a relatively small part of the cost will fall on Bermuda citizens. In such a case, there need be little or no concern about the size of the aggregate revenue potential in relation to some globally efficient level of public goods and services. At essentially zero cost, the ideally desired level of public goods provision for local citizens may be very high indeed.


The domestic supply elasticity of the possible tax bases is, however, of critical importance. If domestic supply is available at sharply increasing costs, or if supply is such as to ensure that prices embody large elements of economic rents, any attempt to export tax burdens to foreigners may fail. Regardless of demand elasticities, the potential taxpayer (who will also be potential supplier of the taxed good and, hence, a potential rent recipient) may not want to allow government to have access to a tax base characterized by low supply elasticity.


The conclusions above relate to taxes on domestically produced goods and services, on exports, broadly considered. The same sort of analysis may, of course, be applied to imports, with the obverse relationships being relevant. If foreign supply to the domestic market is relatively inelastic whereas domestic demand is relatively elastic, the levy of a tax on such a good would be borne largely if not exclusively by foreign citizens rather than those who are resident of the tax-levying jurisdiction. Burden shifting by means of taxes on imports may not be an important instrument for exploitation by a small country, however, since foreign supplies of most goods, to that country, may be highly elastic. On the other hand, when large countries are considered, the whole problem of possible retaliation among a small number of trading countries must be incorporated into the analysis.